Climate change risk is a prudential obligation | KPMG | AU

Climate change risk is a prudential obligation

Climate change risk is a prudential obligation

Climate related risk is recognised by business as one of the most material issues. Apart from greenhouse gas reporting, responses to understand risks and opportunities to business, implement mitigation action and report on performance are largely immature in the market. Inertia has in part been driven by policy uncertainty – a lack of a bipartisan position on climate change and absence of long-term carbon and renewable energy targets beyond 2030.

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The landscape has changed

In the past 6 months we've seen:

  1. The Paris Agreement come into force on 5 October 2016, committing countries to a goal of holding global temperature increases to well below 2 degrees centigrade above pre-industrial levels and to set GHG reduction targets in 5-yearly checkpoints consistent with this ambition. All credible scientific analyses forecast the elimination of carbon emissions from 2050-70.
  2. A legal opinion commissioned by the Centre for Policy development, also in October 2016, found that many climate change risks “would be regarded by a Court as being foreseeable at the present time” and directors “who fail to consider climate change risks now could be found liable for breaching their duty of care and diligence in the future” under s180 (1) of the Corporations Act.
  3. The Financial Stability Board’s Task Force on Climate-related financial Disclosures (TFCD) issued its recommendations in December 2016, calling for businesses to disclose climate impacts and opportunities, governance over climate risk at the board level and management, and processes in place to identify and manage these issues.
  4. APRA announced in February 2017 that climate risk is a foreseeable and material risk to financial institutions and that it is an ‘important and explicit’ part of the agency’s considerations. Directors who fail to properly consider and disclose foreseeable climate-related risks will be held personally liable for breaching their statutory duty of care and diligence under the Corporations Act

Urgent action required

This changing landscape requires urgent action by companies. Directors should:

Identify the climate change risks and opportunities impacting the company in the short, medium and long term. Consider regulatory, transitional and policy risks in the different markets in which the company operates and the exposure to both the business operations and critical supply chains, particularly under conditions consistent with the 2 degree global ambition.

Understand and analyse how these risks can impact on the strategy, operations and ongoing profitability of the businesses. Companies should demonstrate the level of rigor applied to comprehensively evaluating exposures.

Respond by implementing actions to manage risks and opportunities and explain how the scale of response is consistent with the organisation’s risk appetite.

Disclose progress on addressing risks and the processes put in place to manage them, including the selection of metrics and tracking against targets, the ambition of which should also be justified.

How we can help

KPMG can assist businesses to address the business risks as well as and compliance with APRA expectations, legal obligations and the recommendations of the Financial Stability Board’s TCFD through:

  • identification and prioritisation of the physical and transition risks impacting operations and value chains.
  • evaluating business resilience under various plausible future physical, policy and market scenarios, including the 2 degree goal as recommended by the TFCD.
  • analysis of potential financial impacts on revenues, expenditures, future cash flows, as well as assets and liabilities.
  • benchmarking sector and competitor responses and stakeholder analysis to map investor and customer expectations.
  • assessments over the integration of climate risk within strategy and risk management frameworks, and the robustness of responses.
  • KPI and target development to track and disclose climate risk and opportunity management performance, including evaluating the alignment of existing GHG reduction targets against the 2 degree goal (commonly termed science-based targets).

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